Unit economics FAQs
Because this is an important, yet possibly confusing topic, it is worth going over some of the common questions people have about unit economics. Hopefully, you'll come away from this post feeling that you have a firm understanding of how understanding your unit economics can help your business.
Are unit economics important in business?
Yes. Understanding exactly what it costs you to bring in a customer, and exactly how much money you can expect from that customer is vital to properly budgeting. If you aren't maximizing your LTV:CAC ratio and the benefits it brings, then you aren't maximizing your growth, profitability, and sustainability. It's one of the most important metrics your business can work to improve.
How do you calculate the economics of one unit?
The first step to calculating your unit economics is to decide what one unit will represent. For a SaaS business, it makes sense to count a company, and all of the subscriptions they have, as one unit. This is even more true when you are a B2B business. You can, however, count individual subscriptions as a unit if that makes sense for your company. Once you have your unit, calculate how much the lifetime revenue for that unit is, and divide it by your CAC to get the basic economics of that unit. It is a better practice, however, to use the predictive LTV or flexible LTV values, given above, when calculating your unit economics.
How do you improve unit economics?
There are two ways to improve unit economics. The first is to spend less on sales and marketing. This is not the best way, as it will slow growth. Sometimes, you have to reign in spending though, and if the LTV:CAC ratio is too out of balance, cutting the budget makes sense.
The better way is to improve your LTV. ProfitWell can help you can do that by optimizing your pricing, as well as help you take the right steps toward reducing churn and increasing the amount of time a customer stays with you.